Plans to lease Midway Airport were grounded earlier this month due to a lack of competitive bids.
Plans to lease Midway Airport were grounded earlier this month due to a lack of competitive bids. Derek Rust/Flickr
In these deals, investors make large up-front payments to a government entity to take over running a project from a public service or utility. Investors usually pay hundreds of millions of dollars for these rights, and in return, they get to operate that service — and find new ways to make money — for decades.
Robert Puentes of the Brookings Institution tells NPR's David Greene that public-private partnerships are just one of the tools in an infrastructure project's funding toolkit. "It's not going to solve every problem. They're absolutely not appropriate for all types of investment, but if we can find that sweet spot, we can really do a lot of good things in the United States," Puentes says.
Some partnerships work, some don't. Here, Puentes' describes some public-private partnership hits and misses:
Virginia's 495 HOT Lanes — Introduced a range of innovative congestion-reducing technologies (dynamic pricing, high-speed electronic toll collection, incident response) to one of the state's busiest corridors, while also coming in under budget and ahead of schedule.
Chicago's Illinois International Port District — The private partner promises to invest between $100 million and $500 million in upgrading the port's facilities as well as pay 10 percent of its profits — on top of an annual $1 million fee — to the Illinois International Port District. The Port District will get to pay down debt. One advantage is that, unlike with traditional means of infrastructure funding, the city bears little risk. If the private partner invests a lot of money into a port that gains little traffic, the city's finances won't suffer. But if the port turns out hugely successful, Chicago will see little profit.
Hoboken's water service — Through Hoboken's water deal, the city will get an immediate influx of needed capital, users will get improved metering technologies and the contract has extensive protections against rate shocks.
California State Route 125 — Due to low usage, poor demand estimates and high tolls, this 10-mile toll road in San Diego County ended in bankruptcy and necessitated a buyout from the government.
Richmond's Pocahontas Parkway — One of the main components of a good partnership is that both sides share the risks and rewards equally. The contract for the Pocahontas Parkway, though, made the deal lopsided. In this case, the private company got the short end of the stick and is unlikely to make money on their investment.
Atlanta's drinking water system — In 1999, shortly after city officials signed a 20-year, $20.8 million deal with United Water, Atlanta residents suffered an epidemic of water main breaks and water quality issues. Part of the problem: Neither side had a clear sense of what condition the city's water system was in, and what it would take to repair it, when they entered into the contract.
Close to 19 million passengers come through Chicago's Midway Airport each year, and many will spend a lot of cash here — on food, drinks, books, gum, parking and rental cars — not to mention the landing fees and gate fees paid by airlines.
There are a lot of opportunities to make money in a bustling hub airport like this, and the city was hoping to cash in.
Last winter, when the city opened the bidding process in what would have been the first commercial airport to go private, six investment firms expressed interest. But by this summer, the number dwindled to just two, and now, one of the final two has dropped out.
Mayor Rahm Emanuel's response? "I said no to the privatization on Midway. It was not right for the city," Emanuel said earlier this month.
Emanuel says without competitive bids, which he hoped could net the city up to $2 billion up front, he could not guarantee a good return on Midway's lease.
But what got in the way actually had nothing to do with the airport. It was Chicago's parking meters.
What 'Hampered The Deal'
Former Mayor Richard Daley privatized the city's parking meters for $1 billion five years ago and rammed the sweetheart deal through a compliant city council without releasing many details to the public. Parking meter rates skyrocketed to the highest in the country. The city spent the $1 billion up front to balance its budget. And for the 75-year term of the lease, Chicago taxpayers still must reimburse the private operator millions of dollars a year for parking spaces the city has to take out of commission. (A 2009 report from the city's inspector general called it a "dubious financial deal.")
With Chicago voters leery of new privatization deals, Emanuel tried to impose conditions on the Midway deal. He shortened the lease term to no more than 40 years, capped food and parking prices and mandated revenue sharing on top of the big payment the private operator would make up front. The mayor also created an independent oversight panel to review the terms of any Midway lease, chaired by Peter Skosey with the non-profit Metropolitan Planning Council.
"Some of these constraints that we put on it to protect the public interest may have hampered the deal a little bit, and I think the numbers just didn't come out as favorably," Skosey says.
In other words, the private investors didn't see enough profit to make it worth their risk.
Now, experts say that doesn't mean privatization deals shouldn't have protections. The key is balancing safeguards for taxpayers with the opportunity for private investors to make a profit. That balance is trickier when leasing airports, as opposed to simpler assets, such as toll highways and bridges, says Joseph Schofer, an expert in transportation policy and finance at Northwestern University.
"These are bigger deals, more complicated deals and what the municipality, what the region or what they government agency is looking for is the movement of a big chunk of cash across the table to them so they can use that. And I think that investors are looking at that saying, 'There's a lot of risk and I'm not that anxious to be the first one to do that,' " Schofer says.
But, Schofer and other experts say airport privatization in this country will eventually take off, especially as the government entities that own and run them increasingly find it more difficult to raise big sums of money in more traditional ways.